What’s in store for multifamily investors in the new year ahead? Most industry observers are expecting financing volumes to further expand in 2014. “We do think there will be more capital available,” says Bob Barolak, co-COO at Greystone, Lenders will become even more eager to make loans in the multifamily space he says, because of greater confidence in the economy and markets.
Another majore reason for an expected bump in capital available in the next 12 months is that CMBS financing has come back into the multifamily sector – from a volume of practically zero in 2012. “Until the second quarter of 2013, CMBS lenders could not compete in the multifamily space,” Barolak points out. “That has changed in a big way. They will continue to increase market share significantly in 2014.”
Until some time last year, CMBS could not effectively offer interest rates and/or LTVs that match Fannie and Freddie’s, and were thus not competitive in the multifamily space. But, the situation has turned around. Currently, CMBS multifamily financings are carrying interest rates of about 5.10 to 5.20 percent, or about 10 to 15 basis points lower than rates in Fannie Mae transactions, according to Barolak. Maximum LTVs on CMBS loans – up to 75 percent on 10-year terms for multifamily properties – have also become competitive with those of Fannie and Freddie loans.
More over, CMBS lenders can become “extremely aggressive” for deals they want to acquire to round up a securitization pool, Barolak says. In such instances, “they can dramatically lower the interest rate significantly below what Fannie and Freddie will offer.”
CMBS total securitization this year is projected to increase from an expected $87 billion in 2013 to about $100 billion this year, says Hal Holliday, executive vice president of CBRE. (At its peak in 2007, the level of domestic CMBS issuance totaled some $700 billion.) “No question about it,” adds Barolak, CMBS volume in the multifamily sector will unquestionably increase significantly in 2014.
Multifamily loans are valuable components of CMBS securitization pools. Additionally, the low interest rate environment is said to be driving investor demand for the high-yielding CMBS in the securities market. Reflecting the investor demand for the CMBS, CMBS spreads are expected to remain more or less steady going forward this year, says Andrew Wright, CEO of Franklin Street Capital. At the same time, CMBS investors will be maintaining their return requirements for the bonds. Consequently, there will be pressure for spreads not to narrow either, he suggests.
Life insurance companies are another investor group that may also increase their financing volumes in 2014. All indications are that life companies’ appetite for multifamily is only going to grow in 2014, Barolak says. “Everything we are hearing suggests they will.” These institutional lenders may also somewhat change multifamily underwriting metrics from “very conservative to less conservative” this year, adds Holliday.
Contrasting with CMBS and life companies, commercial banks constitute a financing source that may not necessarily increase its volume this year, but will at least maintain the same level. The banks have resolved many of their balance sheet issues and are once again looking for high-yielding real estate business opportunities. Regional, local and community banks in particular have become noticeably active again the past year. Holliday says banks will continue to be active issuing loans, whether term or construction loans.
As far as construction financing, Wright maintains that construction lenders are starting to become much more cautious, recognizing that the phenomenal rent growth of the past few years will start to slow, and that some markets are beginning to get over-heated. “It is not a problem, but people are getting more cautious,” Wright says.
On the interim financing side, private debt capital players are another lending source that are expected to continue increasing their participation in the multifamily space. “Non-bank, high-yield capital sources offering bridge, mezzanine, preferred equity and high LTV first mortgages” are very plentiful today. “It is a very active” area of multifamily financing that will become more significant this year, says Holliday.
Another available multifamily financing option that is anticipated to remain steady is FHA-insured financing, which is expected to continue at the maximum loan commitment level of $25 billion, a level that has been repeatedly reached early in each of the last few years.
The prognostication for increased capital flows is balanced somewhat by possible pullback by Fannie and Freddie, and widely expected increases in interest rates some time this year. Last year, Fannie Mae and Freddie Mac were mandated by their regulator and conservator the Federal Housing Finance Agency (FSFA) to reduce their multifamily financing volume by 10 percent. At press time, it was still an open question whether FHFA would continue to shrink Fannie and Freddie’s footprint further for 2014. The agency was still seeking comments from the industry before it made its decision.
However, even if the decision is to reduce Fannie Mae and Freddie Mac’s financing volumes this year, the newly resurgent CMBS financings could make up for any drops in financings on the GSE side. And in any case, part of the rationale for FHFA to reduce its volume is so the private market could better compete. Thus, arguably, it will be unlikely that FHFA will reduce the financing targets to a level that CMBS could not compensate for.
Rising interest rates, on the other hand, could impact the availability of capital for multifamily as the yields for alternative investments increase and compete for investor dollars. Wright says he could see the 10-year Treasury rate crossing the 4 percent level at “some point in the third or fourth quarter” as the Federal Reserve eases on QE3. As the economy starts to recover and corporate profits improve, Wright says, the Fed would not be likely to continue artificially keeping money “so cheap.”
Nevertheless, the effects of any rise in interest rates on multifamily transactions may be limited: interest rates are still historically low, and increasing NOIs could compensate for the higher interest rates.
Everyting being equal, lenders may continue to feel good about the market. “All in all, t his will be a terrific year for the multifamily markets,” says Holliday. “There may not be the stratospheric rent growth and absorption we experienced in the early years of this recover, but it is going to be a very solid market for multifamily acquisition and lending.” And when financing companies feel good about the sector, they will lend. View PDF